It's only been two weeks since the Federal Reserve cut interest rates for the first time in more than four years, but investors are already getting paid less to park their extra cash. Central bank policymakers trimmed a half point from the fed funds rate in September, bringing it down to a range of 4.75% to 5%.
Two more cuts, totaling another half point, could be in the cards by the end of the year, provided the economy performs as expected, Fed Chair Jerome Powell said on Monday . That means that the days of 5% yields on idle cash are largely in the past, at least for the current cycle. The Crane 100 Money Fund Index had an annual 7-day yield of 5.
1% at the end of August, and just over a month later it's fallen to 4.75%. "The market is telling you that it's not just the fed funds rate [that] will be lower, but so will the rest of the yield curve," said Arvind Narayanan, senior portfolio manager and co-head of investment grade credit at Vanguard.
"You get paid to go a little further [out] on the curve." For long-term investors, the appropriate move ahead of a further decline in rates has largely been to add exposure to bonds with a duration of five to seven years. Those who want to squeeze a little more interest income out of cash they'll need in the next 12 to 18 months, however, will need to assess their options.
Lock in with ladders Three key considerations for investors holding cash would be liquidity, yield and risk. Financial advisors are still loving high-yield certifi.
